Breaking News
Get 40% Off 0
Is NVDA a 🟢 buy or 🔴 sell? Unlock Now

It’s a Banking Crisis: Avoid These Dividend ETFs

By Contrarian Outlook (Brett Owens)Stock MarketsMay 10, 2023 05:17AM ET
www.investing.com/analysis/its-a-banking-crisis-avoid-these-dividend-etfs-200637963
It’s a Banking Crisis: Avoid These Dividend ETFs
By Contrarian Outlook (Brett Owens)   |  May 10, 2023 05:17AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
JPM
+0.56%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
PEP
+0.80%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USB
0.00%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
FITB
+0.36%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

The Wall Street Journal Reports:

Retirees Turn to Dividend ETFs for Income
Financial advisers say investors shouldn’t just go for the fund with the highest dividend yield

Gee, thanks. I have something to add, WSJ friends.

IT’S A BANKING CRISIS. DON’T BUY DIVIDEND ETFs AT ALL!

In a rising market, fine. I can hold my nose. Though, you know, even a popular ticker like Schwab US Dividend Equity ETF (SCHD) is a lazy option that’ll cost you.

SCHD owns 104 dividend stocks and PepsiCo (NASDAQ:PEP) is its top holding. PEP pays a piddly 2.6% but its yearly dividend growth is decent—not great but not AT&T (T) awful, either. PEP’s small raises are the stock’s sugary “dividend magnet” that drives its price higher:

Decent Dividend Growth from Sugar Water

PEP-Price-Dividend
PEP-Price-Dividend

The 104-stock blend gives SCHD investors a 3.3% dividend. Again, not bad.

But SCHD also features the likes of US Bancorp (NYSE:USB), M&T Bank (MTB) and Fifth Third Bancorp (NASDAQ:FITB). Oh boy.

Fundamentally, these banks are fine. But let’s be honest, each is a bank run away from going to zero.

Reason is, most banking business models are flawed (some fatally so) because they are not paying competitive rates. Banks haven’t paid depositers fairly since the Federal Reserve started hiking.

Check out this pre-decapitation screenshot from First Republic Bank’s website. Taken by your income strategist just prior to its fire sale to JPMorgan Chase (NYSE:JPM):

FRC-Interest-Rates
FRC-Interest-Rates

(Brett turns on sarcasm machine.) Wow, what a deal. We can open a savings account with a bank that is about to fail and receive a 1.29% interest rate.

One point two nine percent. In a five percent world!

The rates for big opening deposits of $500,000 or even a million dollars aren’t that much higher. Only up to 1.54%—yikes. And the risk! Why would we put more than the $250,000 limit that the FDIC insures into any bank account these days?

As full-time financial analyst and part-time funnyman Jim Bianco points out in his frequent interviews, we all have phones. We all have mobile banking apps. It’s a few taps for an FRC customer to move savings making 1.29% over to a money market fund paying 5%.

Hence the big problem in the business model of most banks today. They only make money because they underpay their customers.

Dividend history doesn’t mean much when harsh realities set in.

Thus the problem with ETFs. They are sausage factories. In bull markets, we can live with the mystery ingredients.

But when banks are dropping weekly, we must read the labels.

Let’s pick on two other popular dividend ETFs: the Vanguard Dividend Appreciation ETF (VIG) and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

These two are dividend mainstays for many folks because, like SCHD, they focus on large cap US stocks that regularly grow their payouts. Names like Johnson & Johnson (JNJ), PepsiCo (PEP) and 3M (MMM) populate these two funds’ portfolios.

Sounds pretty safe, right?

NOBL goes one better. As the name says, it holds the Dividend Aristocrats, the S&P 500 companies that have grown their payouts for 25 years or more. Throw in low fees (just 0.06% for VIG and 0.35% for NOBL) and, well, what’s not to like?

Lots, actually.

For one, both of these funds should have a built-in advantage because a growing dividend is the No. 1 driver of share prices. This is why in my Hidden Yields advisory we always target dividends that are not only growing but accelerating. These stocks’ “Dividend Magnets” pull their share prices higher over time!

Given the emphasis these ETFs put on rising payouts, beating the market should be a cinch for them, right?

Wrong. You can see that over the last decade VIG and NOBL lagged the S&P 500—shown in purple by the performance of the SPDR S&P 500 ETF Trust (SPY)—despite their rising payouts.

What’s the Point of a Dividend ETF Again?
Dividend-ETFs-Lag
Dividend-ETFs-Lag

It makes you wonder why you’d bother to research dividend ETFs—especially when you look at their current yields: these two pay around 1.9%, only a bit more than SPY’s 1.6%.

Worse, both funds (like all ETFs) are locked into an underlying index. NOBL must own all the Dividend Aristocrats, and VIG is nailed to the S&P US Dividend Growers Index, which aims to mimic the performance of US firms that have raised their payouts annually for at least 10 years.

In other words, shackled to indices as they are, neither fund can avoid a dividend disaster like AT&T. Last year it slashed its payout as part of its spinoff of its WarnerMedia business. Its membership in the Aristocrats was revoked soon after.

But the truth is, AT&T had been dragging down NOBL for years—and because the ETF couldn’t break with its underlying index, it was powerless to sell!

AT&T Was a Lead Weight on NOBL
T-Lags
T-Lags

This is a major reason why we stay away from dividend ETFs and stick to stocks with accelerating payouts instead. By managing our own portfolios, we can dodge the AT&Ts of the world and put our money into the winners instead.

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."

It’s a Banking Crisis: Avoid These Dividend ETFs
 

Related Articles

It’s a Banking Crisis: Avoid These Dividend ETFs

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email